Decentralization and Inequalities in Asia Muhammad ADIL Université Clermont Auvergne, CNRS, CERDI, France Email:
[email protected] [Preliminary draft] Abstract In this paper we analyse how decentralization is associated with regional disparities in 19 Asian coun- tries. Fiscal decentralization literature is mixed on the effects on regional inequalities, whereas political decentralization is yet an area for a greater research in the field. Unlike previous literature we examine the effects of different decentralization measures on inequality both individually and in a mix scenario. We find that decentralization increases inequalities, if at all, with fiscal indicators and partially reduces inequalities with political decentralization measures. These results implicate that overall decentralization policies are necessary in reducing inequalities but they are conditional on certain economic and political institutional arrangements.The use of G2SLS instrumental variable estimation technique further confirms our findings. Our results are robust to the use of alternative measures of regional inequalities. Key words: Fiscal Decentralization, Political Decentralization, Regional disparities, Instrumental Variable. 1 Introduction An important question that the scholars are actively seeking answer to is whether decentralization in- creases or decreases regional inequalities. On the positive side it is argued that the fiscal capacity of sub-national government’s plays an important role in promoting regional convergence. The proximity of local representatives to local population and making policies based on better information on regional preferences makes them a powerful institution in improving regional incomes. Inter jurisdictional com- petition enhances productivity to compete national and international markets. In the same vein the lower levels of governments make efforts to maintain and/or amplify their tax base in competition with other regions.